Greece - Moving ahead to address the challenges

Remarks by Angel Gurría, OECD Secretary-General

Central Bank of Greece Discussion, Athens, 15 March 2010

Governor Provopoulos, Ladies and Gentlemen,

This is an important moment for Greece. We are here today to discuss with you the challenges you are facing and the possible measures that can be taken to modernise the Greek economy and put it on a path of sustained growth. We would like to offer you the OECD support, expertise, and policy experience and to help you any way we can.

The current crisis showed that no single country has all the answers. The handout was prepared in a spirit of cooperation -- the key value of this Organisation. It identifies nine critical areas: (i) public administration and budgets; (ii) pensions; (iii) the governance of state owned enterprises; (iv) tax policies; (v) employment and social policy; (vi) education; (vii) new sources of growth, innovation and green growth; (viii) competition; and (ix) the complex political economy problems associated with reforms in the public sector. For each area we propose an action plan for Greece, which in the best OECD tradition, takes into account practices and reforms that have worked well in other countries and as such are strongly evidence-based.

Let me start by describing the broader policy context world-wide.

While there appear to be encouraging signs that the global economy has turned the corner following the worst recession in the post-war period, all indications point to a slow and hesitant recovery in OECD countries. Also, we see strong headwinds coming from the need to embark on fiscal consolidation. Public finances have indeed suffered badly, but in most countries, the withdrawal of fiscal stimulus, which is needed to ensure the sustainability of public finances, must be balanced against the risk of undermining the nascent recovery.

Yet in Greece, which is facing a major fiscal crisis, budgetary consolidation cannot be delayed. Economic difficulties go deeper than the direct effects of the recent crisis or the large fiscal deficit. Greece has, over the past several years, gradually but persistently lost international competitiveness, resulting in widening current account deficits, a deteriorating international investment position, and a poor record of inward foreign direct investment. This longer term deterioration is a function of several structural impediments which must be corrected if robust growth is to be resumed in the years ahead.

Resolving these problems requires policy action on a broad front.

The essential starting point is a large and rapid fiscal consolidation to stabilise public finances. The measures announced by the government to curb its budget deficit by 4 per cent of GDP in 2010 are ambitious and show the determination of Greece to take the necessary actions. The OECD, as all other international organisations, welcomes this necessary step, which needs to be fully and timely implemented.

But Greece’s fiscal structural problems also need to be tackled in order to prepare the country for the future.

The Greek government has already set out ambitious reforms, including in its updated Stability and Growth Programme. These initiatives should bring important fiscal structural benefits, including a more efficient and modern tax system, improved budgetary process and monitoring and a more reliable statistical system.
Yet they need to be put into a broader framework of longer term reform to tackle the structural inefficiencies which are at the heart of public sector imbalances. Greece at a Glance highlights areas where action is needed.

Let me give some concrete examples.

Given population ageing, measures need to be taken to substantially reduce the increase in public pension outlays in the years ahead, including bringing Greek pensions more in line with other OECD countries. This should include introducing measures to increase the effective retirement age. As foreshadowed in the Stability and Growth Programme, the government should also adopt multi-year spending budgets by the ministries and fiscal rules. For instance, a legally binding fiscal responsibility rule would help prevent the emergence of structural deficits in the future.

Transparency and accountability in the public sector also needs to be enhanced, with the view to modernising and improving the quality of public services, particularly health care and education. International experience shows that granting more autonomy to both primary and secondary schools but also increasing their accountability and teacher incentives can deliver better education services.

Greece should also embark on reforms of wage bargaining, which remains too rigid, and of product markets, which remain over-regulated and insufficiently innovative. In fact, Greece has been slow in taking advantage of the potential of the knowledge and green economies, with innovation indicators consistently lagging those of other advanced economies. As for the labour market, there is an urgent need to improve activation policies and help the most disadvantaged youth.

In fact, any reform process should not forget the disadvantaged groups in society and much can be done to make social policies more effective. This includes for instance, addressing in-work poverty and ensuring that social transfers are well targeted and reach those in need.

Reform in these policy areas holds the promise of unleashing productivity and restoring competitiveness, which would yield sustainable increases in economic growth, jobs and living standards. Our simulations suggest that aligning product market regulations with best practices, including in the network industries, would increase labour productivity by around 20%. This in turn, will facilitate fiscal consolidation in a mutually-reinforcing dynamic.

The situation in Greece also draws attention to major challenges facing the wider euro area economy. The revised Stability and Growth Pact has been at the heart of efforts to achieve sound public finances. While progress has been made to develop the Pact, several countries, including Greece, made insufficient efforts to strengthen their public finances prior to the financial crisis. When the worst happened, many euro area countries faced major fiscal challenges, with large deficits and growing national debt. The Stability and Growth Pact should be strengthened by stricter enforcement, including for the larger countries, and tighter accounting standards to ensure that slippages are detected early. National fiscal institutions should be reformed to provide greater transparency, including better accounting, the use of independent forecasts in budget projections, and the creation of expert independent fiscal councils. These changes are important to ensure that “fiscal comfort zones” be created in good times for use during bad times to counter the cycle.

The Greek crisis has also focused attention on the institutional mechanisms that are needed to help euro area countries facing liquidity problems. These should be tailored to the situation of individual countries and balance the risks of contagion with the moral hazard induced by any insurance provision. So there seems to be some homework to do on the institutional front.

Ladies and Gentlemen,

You can count on the OECD. We are ready to help Greece achieve a sustainable economic recovery and turn our vision for a stronger, cleaner and fairer global economy into a reality.

We look forward to working with Greece as it shapes its future. We are confident that Greece will rise to this historical challenge.